Reader may have to rethink early retirement

Q: I am 56 years of age and am looking to retire at age 60. My yearly income is $45,000. I own my home (with a small mortgage of $40,000), an RRSP of $80,000 plus a pension fund with my place of employment ($45,000). What would be the allowance we receive from the government? Any information you could provide would be greatly appreciated.

A: Thank you for providing your information in a nutshell, dear reader, but you will understand that I have to make some assumptions about your situation in answering your question. Based on your own sources of income, you will have to rethink your goal of retiring in four years. Here’s why.

As you probably are aware, you only become eligible for the federal Old Age Security (OAS) benefit when you attain 65 years of age. Currently, the OAS monthly payment is approximately $550 with quarterly increases based on inflation and the OAS clawback (reduction) kicking in at $70,000 of annual income.

The key point concerning the OAS is that it is a “benefit” and not a pension. What is the difference? A benefit is allocated at the discretion of the government who alone determines eligibility and payment criteria. This is why the Harper government was able to change the OAS age eligibility to age 67 for people born in 1963 and later. The government giveth, and the government taketh away.

A pension such as the Canada or Quebec Pension Plan (CPP or QPP), on the other hand, is held in trust for the contributor with payment entitlement according to preset terms of the plan. The CPP and QPP have almost identical conditions that include a reduction of pension payable when the contributor opts to take their pension earlier than the “normal” age 65.

In your case, with your eligibility for a government pension at age 60 being limited to the reduced Quebec Pension Plan monthly payment of maybe $600 (or $7,200 a year), you will have to make significant withdrawals from your personal savings in order to meet basic living expenses. As you are currently living on $45,000 gross salary a year, I estimate your retirement expenses, including your mortgage payment, to be at least $30,000 a year after tax.

With annual contributions and positive investment returns, your RRSP and employer pension fund may grow to $150,000 during the next four years. However, having to withdraw from $20,000 to $25,000 a year to meet your living expenses will seriously deplete your retirement savings before you even reach age 65, let alone for the balance of what I would hope would be another 30 years of healthy retirement living.

Finally, it is not wise to enter retirement with any debt, including a small mortgage. True, a line of credit secured by your home equity is a way to tap emergency funds, but this should be a last resort in your later years, not a way to fund an early retirement.

You may well have a partner who is sharing expenses with you and is able to help you afford to retire early. If that is the case, you nevertheless need to sit down and fully examine the pros and cons of your decision together. The QPP website has an easy to use retirement income calculator that will help you both figure out different retirement scenarios at http://tinyurl.com/av4qdnx .

But no matter how rosy the picture may look, I still recommend that you find a way to keep earning some income, avoiding debt and adding to your savings for as long as your health permits. As my favourite Vulcan would say — live long and prosper!

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